Dow-Gold Ratio Continues Climb As 'Civilized' Investors Buy Equities

Includes: DIA, GLD, SLV, SPY
by: Kirk Lindstrom

As of the May 7th close of 7.94 for the Dow-Gold Ratio, which is measured in how many ounces of gold it takes to buy the 30-stock Dow Jones Industrial Average, is up 39.0% from its 21-year low of 5.71 set last year on August 22, 2011.

The Dow-Gold Ratio is up 16.9% since breaking above the resistance line I wrote about in the November Seeking Alpha article Dow-Gold Ratio Rallies To Downtrending Resistance Line when it stood at 6.79 with Gold just below its all time high of $1923.70.

The markets, measured by the S&P 500 and DIJA, may have recovered to new highs in 2007, but the Dow-Gold Ratio told a different, truer story of just how unhealthy the U.S. economy was.

All Time Lows: The DJIA-to-Gold ratio got down near 1 in the early 1980s and was just under 0.2 in the early 1800s. This 200-year Dow-Gold chart (courtesy of shows the Dow-Gold ratio from 1800 through August 2008:

Click to enlarge

With the Dow-Gold ratio now at 7.94, it is still trading below the green zone in this chart.

Historically, buying stocks when the ratio is below the green band was rewarding if you had patience.

My key comments to critics from my last Dow-Gold article.

Obviously, this chart from Sharelynx is making estimates to show TRENDS. To me that is useful hence I'll continue to show the chart until I find something better.

The DOW changes often... there was no MSFT or Cisco back in 1896 or even 1956... yet they are in the DOW today. I show the chart knowing it has imperfections so some people don't jump to conclusions saying the ratio is near a historical bottom which some might have using my 30-year chart.

I said I liked stocks in that article six months ago when gold was higher and stocks were lower. I feel the same but I would not short gold. It is very possible gold will go up with stocks in the years ahead given the inability of Western Governments to control spending while relying on printing money to devalue currency.

During a May 4, 2012 CNBC interview Charles Munger, vice chairman of Berkshire Hathaway (BRK.A), said,

"I think gold is a great thing to sew into your garments if you are a Jewish family in Vienna in 1939. But, civilized people don't buy gold. They invest in productive businesses... I love the portfolio we've gradually developed in Berkshire... By and large they are doing productive, useful work, it's not outsmarting the computer systems in the trading markets."

On May 7, 2012 Bill Gates, Microsoft (NASDAQ:MSFT) founder and former CEO, said,

"Certainly equities are, their attractiveness relative to bonds is higher today than any time in my lifetime.... so we have more... we've always had a very high equity percentage but its... ah... virtually EVERYTHING is equity oriented at this point."

It is interesting to me that two of the more successful capitalists in my lifetime don't own any gold as an investment and they are on TV now talking up equities. I can't ever recall Bill Gates talking about stocks as offering good value.

How to trade

Unless you worry about an Armageddon where you could lose access to your investment, one of the safest and easiest ways to trade gold is through an ETF. The fund managers buy and store the metal for you so you don't have to worry about storage costs or security. The major disadvantage is that if the whole financial system melts down, you may lose access to your investment. For that reason, many who want to hedge against inflation and an Armageddon-type event will buy gold bars and coins.

ETF data for Gold (NYSEARCA:GLD) and Dow (NYSEARCA:DIA) as of May 7:

My favorite GLD Charts and Intraday GLD Chart

I prefer SPY for the S&P 500, over DIA because it is more diversified. I agree with Bill Gates that stocks offer tremendous value now. It doesn't mean they won't go lower and give even better value in the short term, but long term I expect they will outperform gold and bonds.

Disclosure: I own some gold jewelry and gold coins mostly for pleasure and for an Armageddon event. For inflation protection, I own individual TIPS and Series-I Bonds which are boring compared to the volatility of gold or silver (NYSEARCA:SLV) but pay inflation adjusted dividends which add stability to my investment portfolio which aids in getting a good night's sleep no matter what the market does. I own SPY and recommend it in my newsletter "explore portfolio."

Disclosure: I am long SPY.